**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

| **ý** | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934.**                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| ** ** | ** ** | **For the  quarterly period ended September 30, 2004.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **OR**     |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **o**      | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934.**                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| ** ** | ** ** | **For the transition period from                                            to                                         ** |

 

**CommissionFile Number: 1-11388**

 

**PLCSYSTEMS INC.**

(ExactName of Registrant as Specified in Its Charter)

 
| **Yukon Territory, Canada**                                     | ** ** | **04-3153858**                       |
|-----------------------------------------------------------------|------------|--------------------------------------|
| (State or Other Jurisdiction of  Incorporation or Organization) |       | (I.R.S. Employer Identification No.) |
|                                                            |       |                                 |
| **10 Forge Park, Franklin, Massachusetts**                      | ** ** | **02038**                            |
| (Address of Principal Executive Offices)                        |       | (Zip Code)                           |

 

Registrant’stelephone number, including area code: **(508) 541-8800**

 

Indicate by check markwhether the registrant: (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.  **Yes      **ý**       No    ****o**

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act)  **Yes**** ****o   No  **ý

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date.

 

| **Class**                  | ** ** | **Outstanding at November 5, 2004** |
|----------------------------|------------|-------------------------------------|
| Common Stock, no par value |       | 30,058,877                          |

 

 

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**PLCSYSTEMS INC.**

 

**Index**

 
| Part  I. | Financial  Information: |                                                                                        |
|----------|-------------------------|---------------------------------------------------------------------------------------------|
|     |                    |                                                                                        |   |
|     | Item  1.                | Financial  Statements                                                                       |   |
|     |                    |                                                                                        |   |
|     |                    | Condensed  Consolidated Balance Sheets (unaudited)                                          |   |
|     |                    |                                                                                        |   |
|     |                    | Condensed  Consolidated Statements of Operations (unaudited)                                |   |
|     |                    |                                                                                        |   |
|     |                    | Condensed  Consolidated Statements of Cash Flows (unaudited)                                |   |
|     |                    |                                                                                        |   |
|     |                    | Notes  to Condensed Consolidated Financial Statements (unaudited)                           |   |
|     |                    |                                                                                        |   |
|     | Item  2.                | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   |
|     |                    |                                                                                        |   |
|     | Item  3.                | Quantitative  and Qualitative Disclosures about Market Risk                                 |   |
|     |                    |                                                                                        |   |
|     | Item  4.                | Controls  and Procedures                                                                    |   |
|     |                    |                                                                                        |   |
| Part II. | Other  Information:     |                                                                                        |
|     |                    |                                                                                        |   |
|     | Item 6.                 | Exhibits                                                                                    |   |

 

2

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**PLC SYSTEMS INC.**

**Part I.  Financial Information**

**Item 1.****    Financial Statements**

**PLCSYSTEMS INC.**

CONDENSEDCONSOLIDATED BALANCE SHEETS

(Inthousands)

(Unaudited)

 
| ** **                                                                                                                                                           | ** ** | **September 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| ASSETS                                                                                                                                                               |       |                    |       |                   |       |
| Current assets:                                                                                                                                                      |       |                    |       |                   |       |
| Cash and cash equivalents                                                                                                                                            |       | $                       | 10,310     |                   | $          | 6,377 |   |
| Accounts receivable, net of allowance of  $138 and $115 in 2004 and 2003, respectively                                                                               |       | 682                     |       | 1,239                  |       |
| Lease receivables                                                                                                                                                    |       | 75                      |       | 376                    |       |
| Inventories, net                                                                                                                                                     |       | 1,336                   |       | 885                    |       |
| Prepaid expenses and other current assets                                                                                                                            |       | 460                     |       | 490                    |       |
| Total current assets                                                                                                                                                 |       | 12,863                  |       | 9,367                  |       |
|                                                                                                                                                                 |       |                    |       |                   |       |
| Equipment, furniture and leasehold  improvements, net                                                                                                                |       | 276                     |       | 206                    |       |
| Other assets                                                                                                                                                         |       | 248                     |       | 276                    |       |
| Total assets                                                                                                                                                         |       | $                       | 13,387     |                   | $          | 9,849 |   |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY                                                                                                                           |       |                    |       |                   |       |
| Current liabilities:                                                                                                                                                 |       |                    |       |                   |       |
| Accounts payable                                                                                                                                                     |       | $                       | 477        |                   | $          | 297 |   |
| Accrued compensation                                                                                                                                                 |       | 510                     |       | 376                    |       |
| Accrued other                                                                                                                                                        |       | 331                     |       | 358                    |       |
| Deferred revenue                                                                                                                                                     |       | 944                     |       | 555                    |       |
| Secured borrowings                                                                                                                                                   |       | 75                      |       | 376                    |       |
| Total current liabilities                                                                                                                                            |       | 2,337                   |       | 1,962                  |       |
|                                                                                                                                                                 |       |                    |       |                   |       |
| Deferred revenue                                                                                                                                                     |       | 4,452                   |       | 331                    |       |
| Total long-term liabilities                                                                                                                                          |       | 4,452                   |       | 331                    |       |
| Commitments and contingencies                                                                                                                                        |       |                    |       |                   |       |
|                                                                                                                                                                 |       |                    |       |                   |       |
| Stockholders’ equity:                                                                                                                                           |       |                    |       |                   |       |
| Preferred stock, no par value, unlimited  shares authorized, none issued and outstanding                                                                             |       |                    |       |                   |       |
| Common stock, no par value, unlimited  shares authorized, 30,059 and 29,896 shares issued and outstanding at  September 30, 2004 and December 31, 2003, respectively |       | 93,725                  |       | 93,636                 |       |
| Accumulated deficit                                                                                                                                                  |       | (86,786                 | )          | (85,749                | )          |
| Accumulated other comprehensive loss                                                                                                                                 |       | (341                    | )          | (331                   | )          |
| Total stockholders’ equity                                                                                                                                      |       | 6,598                   |       | 7,556                  |       |
| Total liabilities and stockholders’ equity                                                                                                                      |       | $                       | 13,387     |                   | $          | 9,849 |   |

 

The accompanying notes are an integral part of the condensedconsolidated financial statements.

 

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**PLCSYSTEMS INC.**

CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS

(Inthousands, except per share data)

(Unaudited)

 
| ** **                                  | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                  | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenues:                                   |       |                                  |       |                                 |       |   |   |   |   |
| Product sales                               |       | $                                     | 1,221      |                                 | $          | 1,899 |   | $ | 4,106 |   | $ | 4,883 |   |
| Placement and service fees                  |       | 385                                   |       | 355                                  |       | 1,205 |   | 1,116 |   |
| Total revenues                              |       | 1,606                                 |       | 2,254                                |       | 5,311 |   | 5,999 |   |
|                                        |       |                                  |       |                                 |       |   |   |   |   |
| Cost of revenues:                           |       |                                  |       |                                 |       |   |   |   |   |
| Product sales                               |       | 379                                   |       | 873                                  |       | 1,544 |   | 1,897 |   |
| Placement and service fees                  |       | 171                                   |       | 134                                  |       | 519 |   | 375 |   |
| Total cost of revenues                      |       | 550                                   |       | 1,007                                |       | 2,063 |   | 2,272 |   |
|                                        |       |                                  |       |                                 |       |   |   |   |   |
| Gross profit                                |       | 1,056                                 |       | 1,247                                |       | 3,248 |   | 3,727 |   |
|                                        |       |                                  |       |                                 |       |   |   |   |   |
| Operating expenses:                         |       |                                  |       |                                 |       |   |   |   |   |
| Selling, general and administrative         |       | 886                                   |       | 747                                  |       | 2,742 |   | 2,578 |   |
| Research and development                    |       | 616                                   |       | 283                                  |       | 1,661 |   | 744 |   |
| Total operating expenses                    |       | 1,502                                 |       | 1,030                                |       | 4,403 |   | 3,322 |   |
|                                        |       |                                  |       |                                 |       |   |   |   |   |
| Income (loss) from operations               |       | (446                                  | )          | 217                                  |       | (1,155 | ) | 405 |   |
|                                        |       |                                  |       |                                 |       |   |   |   |   |
| Other income, net                           |       | 30                                    |       | 8                                    |       | 138 |   | 38 |   |
|                                        |       |                                  |       |                                 |       |   |   |   |   |
| Income (loss) before income taxes           |       | (416                                  | )          | 225                                  |       | (1,017 | ) | 443 |   |
|                                        |       |                                  |       |                                 |       |   |   |   |   |
| Provision for income taxes                  |       | 20                                    |       | —                               |       | 20 |   | — |   |
|                                        |       |                                  |       |                                 |       |   |   |   |   |
| Net income (loss)                           |       | $                                     | (436       | )                                    | $          | 225 |   | $ | (1,037 | ) | $ | 443 |   |
|                                        |       |                                  |       |                                 |       |   |   |   |   |
| Basic and diluted earnings (loss) per share |       | $                                     | (0.01      | )                                    | $          | 0.01 |   | $ | (0.03 | ) | $ | 0.01 |   |
|                                        |       |                                  |       |                                 |       |   |   |   |   |
| Average shares outstanding:                 |       |                                  |       |                                 |       |   |   |   |   |
| Basic                                       |       | 30,059                                |       | 29,836                               |       | 30,013 |   | 29,815 |   |
| Diluted                                     |       | 30,059                                |       | 30,531                               |       | 30,013 |   | 30,120 |   |

 

The accompanying notes are an integral part of the condensedconsolidated financial statements.

 

4

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**PLCSYSTEMS INC.**

CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS

(Inthousands)

(Unaudited)

 
| ** **                                                                                           | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                           | ** ** | **2004**                             | ** ** | **2003** | ** ** |
| Operating activities:                                                                                |       |                                 |       |   |   |
| Net income (loss)                                                                                    |       | $                                    | (1,037     | ) | $ | 443 |   |
|                                                                                                 |       |                                 |       |   |   |
| Adjustments to reconcile net income (loss)  to net cash provided by (used for) operating activities: |       |                                 |       |   |   |
| Depreciation and amortization                                                                        |       | 103                                  |       | 94 |   |
| Change in assets and liabilities:                                                                    |       |                                 |       |   |   |
| Accounts receivable                                                                                  |       | 558                                  |       | 191 |   |
| Inventory                                                                                            |       | (451                                 | )          | (208 | ) |
| Prepaid expenses and other assets                                                                    |       | 30                                   |       | (136 | ) |
| Accounts payable                                                                                     |       | 180                                  |       | 67 |   |
| Deferred revenue                                                                                     |       | 4,510                                |       | 343 |   |
| Accrued liabilities                                                                                  |       | 108                                  |       | (408 | ) |
| Net cash provided by operating activities                                                            |       | 4,001                                |       | 386 |   |
|                                                                                                 |       |                                 |       |   |   |
| Investing activities:                                                                                |       |                                 |       |   |   |
| Investment in equipment                                                                              |       | (146                                 | )          | (101 | ) |
|                                                                                                 |       |                                 |       |   |   |
| Financing activities:                                                                                |       |                                 |       |   |   |
| Proceeds from sales of common shares                                                                 |       | 90                                   |       | 19 |   |
| Secured borrowings                                                                                   |       | —                               |       | (72 | ) |
|                                                                                                 |       |                                 |       |   |   |
| Net cash provided by (used for) financing  activities                                                |       | 90                                   |       | (53 | ) |
|                                                                                                 |       |                                 |       |   |   |
| Effect of exchange rate changes on cash and  cash equivalents                                        |       | (12                                  | )          | 52 |   |
| Net increase in cash and cash equivalents                                                            |       | 3,933                                |       | 284 |   |
|                                                                                                 |       |                                 |       |   |   |
| Cash and cash equivalents at beginning of  period                                                    |       | 6,377                                |       | 5,932 |   |
| Cash and cash equivalents at end of period                                                           |       | $                                    | 10,310     |   | $ | 6,216 |   |

 

The accompanying notes are an integral part of the condensedconsolidated financial statements.

 

5

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**PLCSYSTEMS INC.**

NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September30, 2004

 

***1.******            ******Natureof Business***

 

PLCSystems Inc. (“we,” “PLC” or the “Company”) is a medical device company thatspecializes in the design, development and manufacturing of a patented carbondioxide (CO2) laser and disposable handpieces, known as The HeartLaser System, that is used to treat patients withsevere angina in a surgical procedure known as transmyocardialrevascularization, or TMR. In the United States, the Company sells its TMRproducts to Edwards Lifesciences. Edwards has the exclusive right to market and distribute the Company’sTMR products in the United States.

 

PLC’scurrent business strategy involves broadening and diversifying its productportfolio beyond its current TMR offerings, by developing or acquiring new andinnovative medical devices to address cardiac and vascular related markets. InFebruary 2004, the Company, consistent with this business strategy, enteredinto a new agreement with Edwards to develop and manufacture a surgical cardiacablation laser designed to treat cardiac arrhythmias (See Note 3).

 

Edwardsis our largest shareholder, owning approximately 18% of our outstanding commonstock as of September 30, 2004, and has a representative on our Board ofDirectors.  Edwards is also our largestcustomer, accounting for approximately 89% of the Company’s total sales in 2003and 86% of the Company’s total sales for the nine months ended September 30,2004.

 

***2.******            ******Basis of Presentation***

 

Theaccompanying unaudited condensed consolidated financial statements of theCompany have been prepared in accordance with generally accepted accountingprinciples for interim financial information and with the instructions to Form10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotesrequired by generally accepted accounting principles for complete financialstatements.  In the opinion ofmanagement, all adjustments (consisting of normal recurring accruals)considered necessary for a fair presentation have been included.  Operating results for the three and ninemonths ended September 30, 2004 are not necessarily indicative of the resultsthat may be expected for the year ending December 31, 2004.  These financial statements should be read inconjunction with the consolidated financial statements and footnotes theretoincluded in the Company’s annual report on Form 10-K for the year endedDecember 31, 2003.

 

***3.******            ******EdwardsTransaction***

 

InFebruary 2004, the Company signed an agreement with Edwards to assumedevelopment of a surgical cardiac ablation laser system designed to treatcardiac arrhythmias. Under the terms of the agreement, the Company will haveexclusive manufacturing rights to build the new laser system and other relatedsurgical products. The Company will be responsible, among other things, forongoing research and development and manufacture of the product and forobtaining regulatory approvals.  Edwardswill be responsible for the approval, funding and conduct of any clinicalstudies designed to obtain data in support of a new product approval or

 

6

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clearance as required by the FDA or other regulatorybody.

 

Inconjunction with signing this new agreement, the terms of the Company’s TMR distributionagreement with Edwards were modified to (1) extend the term of the agreementuntil at least October 17, 2017 and (2) reduce the Company’s share of revenueon TMR kits sold to hospitals. The Company received as consideration fromEdwards, a lump-sum payment of $4,533,333, which initially was recorded asdeferred revenue in the Company’s consolidated balance sheet.   The Company expects to amortize the$4,533,333 into its consolidated statement of operations as revenue over thenext seven years under the units-of-revenue method as prescribed by EmergingIssues Task Force (EITF) 88-18, *Sales of Future Revenue*.  For the three and nine months ended September30, 2004, the Company has recorded amortization of $61,000 and $133,000,respectively.

 

***4.******            ******Earnings (Loss) per Share***

 

In2004, basic and diluted loss per share have been computed using only theweighted average number of common shares outstanding during the period withoutgiving effect to any potential future issues of common stock related to stock optionprograms and warrants since their inclusion would be antidilutive.

 

In2003, basic earnings per share was computed using only the weighted averagenumber of common shares outstanding during the period, while diluted earningsper share was computed using the weighted average number of common sharesoutstanding during the period plus the effect of outstanding stock options andwarrants using the treasury stock method. In calculating diluted earnings per share, the dilutive effect of stockoptions and warrants is computed using the average market price for therespective period.

 

Forthe three and nine months ended September 30, 2004 and 2003, 6,190,000 and4,122,000 shares, respectively, attributable to outstanding stock options andwarrants were excluded from the calculation of diluted earnings (loss) pershare because the effect was antidilutive. The following table sets forth the computation of basic and dilutedearnings (loss) per share:

 
| ** **                                           | ** ** | **Three Months Ended  September 30,**         | ** ** | **Nine Months Ended   September 30,** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------------|------------|---------------------------------------|------------|
| ** **                                           | ** ** | **2004**                                      | ** ** | **2003**                              | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                           | ** ** | **(In thousands, except earnings per share)** | ** ** |
|                                                 |       |                                          | ** ** |
| Net income (loss) available for common  shareholders |       | $                                             | (436       | )                                     | $          | 225 |   | $ | (1,037 | ) | $ | 443 |   |
| Weighted average outstanding shares of  common stock |       | 30,059                                        |       | 29,836                                |       | 30,013 |   | 29,815 |   |
| Dilutive effect of employee stock options            |       | —                                        |       | 695                                   |       | — |   | 305 |   |
| Common stock and common stock equivalents            |       | 30,059                                        |       | 30,531                                |       | 30,013 |   | 30,120 |   |
| Earnings (loss) per share:                           |       |                                          |       |                                  |       |   |   |   |   |
| Basic                                                |       | $                                             | (0.01      | )                                     | $          | 0.01 |   | $ | (0.03 | ) | $ | 0.01 |   |
| Diluted                                              |       | $                                             | (0.01      | )                                     | $          | 0.01 |   | $ | (0.03 | ) | $ | 0.01 |   |

 

7

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***5.******            ******Stock-BasedCompensation***

 

The Company grants stockoptions for a fixed number of shares to employees and certain other individualswith exercise prices equal to the fair value of the shares at the dates ofgrant. The Company has adopted the disclosure-only provisions of Statement ofFinancial Accounting Standards No. 123, *Accounting for Stock-basedCompensation* (“FAS 123”), as amended, and will continue to accountfor its stock option plans in accordance with the provisions of AccountingPrinciples Board Opinion 25, *Accounting for StockIssued to Employees*.

 

The following table illustrates theeffect on net income (loss) and basic earnings (loss) per share if the Companyhad applied the fair value recognition provisions of FAS 123 to stock-basedemployee compensation:

 
| ** **                                                                                                          | ** ** | **Three Months Ended  September 30,**     | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                          | ** ** | **2004**                                  | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                                          | ** ** | **(In thousands, except per share data)** | ** ** |
| Net income (loss) attributable to common  stockholders— As reported                                            |       | $                                         | (436       | )                                    | $          | 225 |   | $ | (1,037 | ) | $ | 443 |   |
| Deduct total stock-based compensation  expense determined under fair value based method for all stock option awards |       | (39                                       | )          | (35                                  | )          | (431 | ) | (111 | ) |
| Net income (loss) attributable to common  stockholders—Pro forma                                               |       | $                                         | (475       | )                                    | $          | 190 |   | $ | (1,468 | ) | $ | 332 |   |
| Earnings (loss) per basic and diluted share  attributable to common stockholders—As reported                   |       | $                                         | (0.01      | )                                    | $          | 0.01 |   | $ | (0.03 | ) | $ | 0.01 |   |
| Earnings (loss) per basic and diluted share  attributable to common stockholders—Pro forma                     |       | $                                         | (0.02      | )                                    | $          | 0.01 |   | $ | (0.05 | ) | $ | 0.01 |   |

 

Thefair value of issued options at the date of grant was estimated using theBlack-Scholes model with the following weighted average assumptions:

 
| ** **            | ** ** | **Three Months Ended  September 30,** | ** ** |
|-----------------------|------------|---------------------------------------|------------|
| ** **            | ** ** | **2004**                              | ** ** | **2003** | ** ** |
| Expected life (years) |       | N/A                                   |       | 3 |   |
| Interest rate         |       | N/A                                   |       | 2.50 | % |
| Volatility            |       | N/A                                   |       | .601 |   |

 

TheCompany did not grant any stock options during the quarter ended September 30,2004.  Therefore, there were noassumptions of expected life, interest rate or volatility.

 

***6.******            ******Comprehensive Income (Loss)***

 

Totalcomprehensive loss for the three and nine month periods ended September 30,2004

 

8

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amounted to $440,000 and $1,047,000, respectively, ascompared to total comprehensive income of $248,000 and $453,000 in the threeand nine month periods ended September 30, 2003.  Comprehensive income (loss) is comprised ofnet income (loss) plus the increase/decrease in currency translationadjustment.

 

***7.******            ******Inventories***

 

Inventories are stated atthe lower of cost or market using the first-in, first-out (FIFO) method andconsist of the following (in thousands):

 
| ** **       | ** ** | **September 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|------------------|------------|-------------------------|------------|------------------------|------------|
| Raw materials    |       | $                       | 619        |                   | $          | 668 |   |
| Work in progress |       | 208                     |       | 70                     |       |
| Finished goods   |       | 509                     |       | 147                    |       |
|             |       | $                       | 1,336      |                   | $          | 885 |   |

 

At September 30, 2004 andDecember 31, 2003, inventories are stated net of a reserve of $523,000 and$806,000, respectively, for potentially obsolete inventory.

 

***8.******            ******Revenue Recognition***

 

TheCompany records revenue from the sale of TMR kits at the time of shipment toEdwards.  TMR kit revenues include theamount invoiced to Edwards for kits shipped pursuant to purchase ordersreceived, as well as an amortized portion of deferred revenue related to Edwards’lump sum TMR kit prepayment received in February 2004.  The Company expects to amortize theprepayment into its consolidated statement of operations as revenue over thenext seven years under the units-of-revenue method as prescribed by EmergingIssues Task Force (EITF) 88-18, *Sales of Future Revenue*.  For the three and nine months ended September30, 2004, the Company has recorded amortization of $61,000 and $133,000,respectively.

 

TMRlasers are billed to Edwards in accordance with purchase orders that theCompany receives. Invoiced TMR lasers are recorded as other current assets anddeferred revenue on the Company’s consolidated balance sheet until such time asthe laser is shipped to a hospital, at which time the Company records revenueand cost of revenue.

 

Underthe terms of the Edwards TMR distribution agreement, once Edwards has recovereda prescribed amount of revenue from a hospital for the use or purchase of alaser, any additional revenues earned by Edwards are shared with the Companypursuant to a formula established in the distribution agreement. The Companyonly records its share of such additional revenue, if any, at the time therevenue is earned.

 

The Company records revenue fromthe sale of TMR kits and lasers to international distributors or hospitals atthe time of shipment.

 

Prior toentering into the Edwards TMR distribution agreement, the Company installedlasers in hospitals under placement contracts that did not transfer substantialownership of the

 

9

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equipmentto the customer. Revenues from these transactions are recognized over the lifeof the placement agreement in accordance with the specific terms of thecontract.

 

Revenues from service andmaintenance contracts are recognized ratably over the life of the contract.

 

Installation revenuesrelated to a laser transaction are recorded as a component of placement andservice fees when the laser is installed.

 

# ***9.****            **Warranty and PreventativeMaintenance Costs*

 

TheCompany warranties its products against manufacturing defects under normal useand service during the warranty period. The Company obtains similar warranties from a majority of its suppliers,including those who supply critical Heart Laser System components.  In addition, under the terms of our TMRdistribution agreement with Edwards, the Company is able to bill Edwards foractual warranty costs, including preventative maintenance services, up to aspecified amount during the warranty period.

 

TheCompany evaluates the estimated future unrecoverable costs of warranty andpreventative maintenance services for its installed base of lasers on aquarterly basis and adjusts its warranty reserve accordingly.  The Company considers all available evidence,including historical experience and information obtained from supplier audits.

 

Changesin the warranty accrual were as follows (in thousands):

 
| ** **                                                 | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                 | ** ** | **2004**                             | ** ** | **2003** | ** ** |
| Balance, beginning of period                               |       | $                                    | 60         |   | $ | 100 |   |
| Payments made                                              |       | —                               |       | — |   |
| Change in liability for warranties issued  during the year |       | 7                                    |       | 15 |   |
| Change in liability for preexisting  warranties            |       | (7                                   | )          | (55 | ) |
| Balance, end of period                                     |       | $                                    | 60         |   | $ | 60 |   |

 

**Item 2.****        Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

Thisquarterly report (including certain information incorporated herein byreference) contains forward-looking statements within the meaning of Section27A of the Securities Act of 1933, as amended, and Section 21E of theSecurities Exchange Act of 1934, as amended. Statements containing terms such as “believes”, “plans”, “expects”, “anticipates”,“intends”, “estimates” and similar expressions contain uncertainty and areforward-looking statements. Forward-looking statements are based on currentplans and expectations and involve known and unknown important risks anduncertainties that could cause actual results to differ materially from thosedescribed in the forward-looking statements. Such important factors anduncertainties include, but are not limited to, those set forth below under theheading “Certain Factors that May Affect our Future Results” and elsewhere inthis quarterly report.

 

10

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**Application of Critical Accounting Policies and Estimates**

 

Thismanagement’s discussion and analysis of financial condition and results ofoperations is based on our condensed consolidated financial statements, whichhave been prepared in accordance with accounting principles generally acceptedin the United States.  Our significantaccounting policies are more fully described in Note 2 of the Notes toConsolidated Financial Statements as well as in “Item 7 - Management’sDiscussion and Analysis of Financial Condition and Results of Operations –Critical Accounting Policies and Estimates”, each as contained in our AnnualReport on Form 10-K for the year ended December 31, 2003.  No significant changes were made to thosepolicies during the three months ended September 30, 2004, other than anaddition to the Company’s revenue recognition policy to account for Edwards’prepayment of future TMR kit revenues in accordance with EITF 88-18, *Sales of Future Revenues*. The Company’s revenue recognition policy has been updated as follows:

 

***Revenue Recognition***

 

TheCompany records revenue from the sale of TMR kits at the time of shipment toEdwards.  TMR kit revenues include theamount invoiced to Edwards for kits shipped pursuant to purchase ordersreceived, as well as an amortized portion of deferred revenue related toEdwards’ lump sum TMR kit prepayment received in February 2004.  The Company expects to amortize theprepayment into its consolidated statement of operations as revenue over thenext seven years under the units-of-revenue method as prescribed by EmergingIssues Task Force (EITF) 88-18, *Sales of Future Revenue*.

 

TMRlasers are billed to Edwards in accordance with purchase orders that theCompany receives. Invoiced TMR lasers are recorded as other current assets anddeferred revenue on the Company’s consolidated balance sheet until such time asthe laser is shipped to a hospital, at which time the Company records revenueand cost of revenue.

 

Underthe terms of the Edwards TMR distribution agreement, once Edwards has recovereda prescribed amount of revenue from a hospital for the use or purchase of alaser, any additional revenues earned by Edwards are shared with the Companypursuant to a formula established in the distribution agreement. The Companyonly records its share of such additional revenue, if any, at the time the revenueis earned.

 

The Company records revenue fromthe sale of TMR kits and lasers to international distributors or hospitals atthe time of shipment.

 

Prior toentering into the Edwards TMR distribution agreement, the Company installedlasers in hospitals under placement contracts that did not transfer substantialownership of the equipment to the customer. Revenues from these transactionsare recognized over the life of the placement agreement in accordance with thespecific terms of the contract.

 

Revenues from service andmaintenance contracts are recognized ratably over the life of the contract.

 

Installation revenuesrelated to a laser transaction are recorded as a component of placement andservice fees when the laser is installed.

 

11

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**Resultsof Operations**

 

Results for the three andnine months ended September 30, 2004 and 2003 and the related percent ofrevenues were as follows:

 
| ** **                            | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                            | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                            | ** ** | **$**                                 | ** ** | **%**                                | ** ** | **$** | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** |
| ** **                            | ** ** | **(dollars in thousands)**            | ** ** |
|                                  |       |                                  |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total revenue                         |       | 1,606                                 |       | 100                                  |       | 2,254 |   | 100 |   | 5,311 |   | 100 |   | 5,999 |   | 100 |   |
| Total cost of revenues                |       | 550                                   |       | 34                                   |       | 1,007 |   | 45 |   | 2,063 |   | 39 |   | 2,272 |   | 38 |   |
| Gross profit                          |       | 1,056                                 |       | 66                                   |       | 1,247 |   | 55 |   | 3,248 |   | 61 |   | 3,727 |   | 62 |   |
| Selling, general & administrative |       | 886                                   |       | 56                                   |       | 747 |   | 32 |   | 2,742 |   | 52 |   | 2,578 |   | 43 |   |
| Research & development            |       | 616                                   |       | 38                                   |       | 283 |   | 13 |   | 1,661 |   | 31 |   | 744 |   | 12 |   |
| Income (loss) from operations         |       | (446                                  | )          | (28                                  | )          | 1,030 |   | 10 |   | (1,155 | ) | (22 | ) | 405 |   | 7 |   |
| Other income                          |       | 30                                    |       | 2                                    |       | 8 |   | 0 |   | 138 |   | 3 |   | 38 |   | 0 |   |
| Income (loss) before taxes            |       | (416                                  | )          | (26                                  | )          | 225 |   | 10 |   | (1,017 | ) | (19 | ) | 443 |   | 7 |   |
| Provision for income taxes            |       | 20                                    |       | (1                                   | )          | 0 |   | 0 |   | 20 |   | 1 |   | 0 |   | 0 |   |
| Net income (loss)                     |       | (436                                  | )          | (27                                  | )          | 225 |   | 10 |   | (1,037 | ) | (20 | ) | 443 |   | 7 |   |

 
| ** **                                      | ** ** | **Three Months Ended  September 30,** | ** ** | ** ** | ** ** | ** **                         | ** ** | **Nine Months Ended  September 30,** | ** ** | ** ** | ** ** | ** **                         | ** ** |
|-------------------------------------------------|------------|---------------------------------------|------------|------------|------------|------------------------------------|------------|--------------------------------------|------------|------------|------------|------------------------------------|------------|
| ** **                                      | ** ** | **2004**                              | ** ** | **2003**   | ** ** | **Increase (decrease)  over 2003** | ** ** | **2004**                             | ** ** | **2003**   | ** ** | **Increase (decrease)  over 2003** | ** ** |
| ** **                                      | ** ** | **$**                                 | ** ** | **$**      | ** ** | **$**                              | ** ** | **%**                                | ** ** | **$**      | ** ** | **$**                              | ** ** | **$** | ** ** | **%** | ** ** |
| ** **                                      | ** ** | **(dollars in thousands)**            | ** ** |
|                                            |       |                                  |       |       |       |                               |       |                                 |       |       |       |                               |       |   |   |   |   |
| Product sales                                   |       | 1,221                                 |       | 1,899      |       | (678                               | )          | (36                                  | )          | 4,106      |       | 4,883                              |       | (777 | ) | (16 | ) |
| Placement and service fees                      |       | 385                                   |       | 355        |       | 30                                 |       | 8                                    |       | 1,205      |       | 1,116                              |       | 89 |   | 8 |   |
| Total revenues                                  |       | 1,606                                 |       | 2,254      |       | (648                               | )          | (29                                  | )          | 5,311      |       | 5,999                              |       | (688 | ) | (11 | ) |
| Product cost of sales                           |       | 379                                   |       | 873        |       | (494                               | )          | (57                                  | )          | 1,544      |       | 1,897                              |       | (353 | ) | (19 | ) |
| Placement and service fees cost of sales        |       | 171                                   |       | 134        |       | 37                                 |       | 28                                   |       | 519        |       | 375                                |       | 144 |   | 38 |   |
| Total cost of revenues                          |       | 550                                   |       | 1,007      |       | (457                               | )          | (45                                  | )          | 2,063      |       | 2,272                              |       | (209 | ) | (9 | ) |
| Gross profit                                    |       | 1,056                                 |       | 1,247      |       | (191                               | )          | (15                                  | )          | 3,248      |       | 3,727                              |       | (479 | ) | (13 | ) |
| Selling, general & administrative  expenses |       | 886                                   |       | 747        |       | 139                                |       | 19                                   |       | 2,742      |       | 2,578                              |       | 164 |   | 6 |   |
| Research & development expenses             |       | 616                                   |       | 283        |       | 333                                |       | 118                                  |       | 1,661      |       | 744                                |       | 917 |   | 123 |   |
| Total operating expenses                        |       | 1,502                                 |       | 1,030      |       | 472                                |       | 46                                   |       | 4,403      |       | 3,322                              |       | 1,081 |   | 33 |   |
| Other income                                    |       | 30                                    |       | 8          |       | 22                                 |       | 275                                  |       | 138        |       | 38                                 |       | 100 |   | 263 |   |
| Income (loss) before taxes                      |       | (416                                  | )          | 225        |       | (641                               | )          | (285                                 | )          | (1,017     | )          | 443                                |       | (1,460 | ) | (330 | ) |
| Provision for income taxes                      |       | 20                                    |       | 0          |       | 20                                 |       | —                               |       | 20         |       | —                             |       | 20 |   | — |   |
| Net income (loss)                               |       | (436                                  | )          | 225        |       | (661                               | )          | (294                                 | )          | (1,037     | )          | 443                                |       | (1,480 | ) | (334 | ) |

 

***Product Sales***

 

Productsales decreased $678,000 and $777,000 during the three and nine months endedSeptember 30, 2004, respectively, as compared to three and nine months endedSeptember 30, 2003.

 

12

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Laser revenues, which is the largest component of product sales,decreased by $668,000 and $746,000, respectively, for the three and nine monthperiods ended September 30, 2004 as compared to the three and nine monthperiods ended September 30, 2003.

 

Inthe three months ended September 30, 2004, the decrease is primarily related toa decrease in the number of domestic units sold offset in part by an increasein the revenue sharing earned under the TMR distribution agreement withEdwards.

 

Inthe nine months ended September 30, 2004, the decrease is primarily due to (1)a decrease in the number of domestic units sold, (2) a lower average sellingprice on domestic laser transactions and (3) lower international laserrevenue.  These factors causing thedecline were offset in part by an increase in the revenue sharing earned underthe TMR distribution agreement with Edwards.

 

Disposable TMR kit revenues, which is the second largest component of productsales, decreased by $21,000 and $93,000, respectively, for the three and ninemonth periods ended September 30, 2004 as compared to the three and nine monthperiods ended September 30, 2003.

 

Inthe three months ended September 30, 2004, the decrease is primarily related toa decrease in domestic disposable revenue stemming from a lower volume of kitshipments to Edwards coupled with a reduced share of revenue on TMR kits.  The reduced share of revenue on TMR kits is aresult of a modification to the TMR distribution agreement in February 2004,whereby the Company’s share of revenue on TMR kits sold to hospitals wasreduced to 36.5% of the customer generated revenue.  The impact of this reduced share was offsetin part by $61,000 of amortization of deferred revenue.  This overall decrease in domestic disposablerevenue was partially offset by higher international disposable revenue due toan increase in the number of TMR kits shipped to international customers.

 

Inthe nine months ended September 30, 2004, the decrease in disposable revenuesis primarily related to (1) a decrease in the number of domestic TMR kitsshipped to Edwards, (2) a reduced share of revenue on TMR kits (as a result ofthe aforementioned modification to the TMR distribution agreement) and (3) adecrease in the number of international TMR kits shipped to hospitals.  The negative impact of these factors wasoffset in part by $133,000 of amortization of deferred revenue.

 

Finally,other product sales, increased $11,000 and $62,000, respectively, for the threeand nine month periods ended September 30, 2004 compared to the three and ninemonth periods ended September 30, 2003.

 

***Placement and Service Fees***

 

Placementand services fees increased $30,000 and $89,000 during the three and ninemonths ended September 30, 2004, respectively, as compared to the three andnine months ended September 30, 2003.

 

Placementfees declined $12,000 and $72,000, respectively, for the three and nine monthperiods ended September 30, 2004 as compared to the three and nine monthperiods ended

 

13

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September 30, 2003.

 

Domesticplacement fees decreased $34,000 and $163,000 in the three and nine monthsended September 30, 2004. These decreases are attributable to a reduction indomestic placement fees associated with the Company’s older installed base ofHL1’s.  International placement feesincreased $22,000 and $91,000 in the three and nine months ended September 30,2004 due to a new HL2 placement contract customer.

 

Servicefees increased $42,000 and $161,000, respectively, for the three and nine monthperiods ended September 30, 2004 as compared to the three and nine monthperiods ended September 30, 2003 due to more domestic lasers in service in2004, which resulted in increased billings to Edwards for service contracts andother service related calls.

 

***Gross Profit***

 

Totalgross profit for the three and nine months ended September 30, 2004 was$1,056,000, or 66% of revenues, and $3,248,000, or 61% of revenues,respectively, as compared to $1,247,000, or 55% of revenues, and $3,727,000, or62% of revenues, for the comparable periods in 2003.  The lower gross margin dollars in the threemonths ended September 30, 2004, is due to a decrease in the number of domesticlaser shipments offset in part by an increase in the revenue sharing earnedunder the TMR distribution agreement with Edwards.

 

Thelower gross margin dollars in the nine months ended September 30, 2004, is dueto (1) a decrease in the number of domestic laser shipments, (2) a loweraverage domestic laser selling price, (3) lower international laser revenue and(4) lower disposable revenues.  Thesedecreases were offset in part by an increase in the revenue sharing earnedunder the TMR distribution agreement with Edwards.

 

***Selling, General and AdministrativeExpenses***

 

Selling,general and administrative expenditures were $886,000 and $2,742,000 for thethree and nine months ended September 30, 2004, an increase of $139,000 and$164,000, respectively, when compared to expenditures of $747,000 and$2,578,000 in the three and nine months ended September 30, 2003.

 

Theoverall increase in selling, general, and administrative expenses in the threemonths ended September 30, 2004, as compared to the three months endedSeptember 30, 2003, is primarily the result of increased expenditures relatedto legal fees, bad debt expense and employee compensation and related fringebenefits offset in part by decreased expenditures related to travel.

 

Theoverall increase in selling, general, and administrative expenses in the ninemonths ended September 30, 2004, as compared to the nine months ended September30, 2003, is primarily the result of increased expenditures related to legalfees and bad debt expense offset in part by decreased expenditures related toemployee compensation and related fringe benefits, travel and annual meetingexpenses.

 

***Research and Development Expenses***

 

Researchand development expenditures were $616,000 and $1,661,000 for the three and

 

14

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nine months ended September 30, 2004, increasesof $333,000 and $917,000, respectively, when compared to $283,000 and $744,000in the three and nine months ended September 30, 2003.  The increased expenditures were incurred inconnection with the development of the Optiwave 980TM Cardiac LaserAblation System (“Optiwave 980 System”) and additional product development workon longer term research and development projects.

 

Weexpect to continue to incur significant new research and developmentexpenditures in future quarters in pursuit of our business strategy to broadenand diversify our product portfolio beyond our current TMR offerings. Inparticular, we expect our 2004 fourth quarter research and developmentexpenditures to increase in the aggregate approximately $300,000 to $500,000compared to the fourth quarter of 2003 as we complete the development of theOptiwave 980 System and advance certain other longer term research and developmentprojects.

 

***Other Income***

 

Otherincome for the nine months ended September 30, 2004 includes proceeds from aninsurance settlement. In addition, interest income increased in the three andnine months ended September 30, 2004 as compared to the three and nine monthsended September 30, 2003 due to higher average cash balances.

 

***Net Income (Loss)***

 

TheCompany incurred a net loss in the three and nine months ended September 30,2004 as compared to net income in the three and nine months ended September 30,2003 due to higher operating expenses and lower gross margin dollars.

 

Althoughthe Company incurred a net loss in the three and nine months ended September30, 2004, the Company expects to have taxable income as a result of the advancepayment received from Edwards in February 2004. The Company has available U.S. net operating loss carryforwards;however, these may not be used to fully offset the Company’s tax liability as aresult of alternative minimum tax rules. Accordingly, the Company has provided an income tax provision.  In the three and nine months ended September30, 2003, the Company had taxable income while its U.S. net operating losscarryforwards were available to reduce taxable income in 2003.

 

Weexpect to incur a net loss in the fourth quarter of 2004, due in large part toour planned increased investment in research and development, as discussedabove.

 

***Kit Shipments***

 

Weview disposable kit shipments to end users as an important metric in evaluatingour business.  We believe kit shipmentsare a reasonable indicator for the adoption of TMR as a therapy in themarketplace.  Disposable kit shipments toend users during the three and nine months ended September 30, 2004 andSeptember 30, 2003 were as follows:

 

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| ** **    | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,**   | ** ** |
|---------------|------------|--------------------------------------|------------|---------------------------------------|------------|
| ** **    | ** ** | **2004**                             | ** ** | **% Increase  (decrease)  over 2003** | ** ** | **2003** | ** ** | **2004** | ** ** | **% Increase  (decrease)  over 2003** | ** ** | **2003** | ** ** |
|          |       |                                 |       |                                  |       |   |   |   |   |   |   |   |   |
| Domestic      |       | 539                                  |       | 10                                    | %          | 488 |   | 1,423 |   | 2 | % | 1,395 |   |
| International |       | 53                                   |       | 253                                   | %          | 15 |   | 99 |   | (24 | )% | 130 |   |
| Total         |       | 592                                  |       | 18                                    | %          | 503 |   | 1,522 |   | — |   | 1,525 |   |

 

**Liquidity and Capital Resources**

 

AtSeptember 30, 2004, the Company had cash and cash equivalents of $10,310,000.

 

Duringthe nine-month period ended September 30, 2004, the Company recorded a net lossof $1,037,000.  The net loss was offsetby net favorable working capital changes (primarily an increase in deferredrevenue of $4,510,000) which resulted in net cash provided by operatingactivities of approximately $4,001,000. Cash used in investing activities was approximately $146,000, consistingof an investment in equipment.  Cashprovided by financing activities was approximately $90,000, consisting ofproceeds from the exercise of stock options and shares purchased under theemployee stock purchase plan.  TheCompany believes that its existing cash resources will meet its working capitalrequirements through the next 12 months.

 

Weare largely dependent on the success of Edwards’ sales and marketing efforts inthe U.S. to continue to increase the installed base of HL2 lasers andsubstantially increase TMR procedural volumes and revenues. Should theinstalled base of HL2 lasers or TMR procedural volume not increasesufficiently, our liquidity and capital resources will be negativelyimpacted.  Additionally, otherunanticipated decreases in operating revenues or increases in expenses orfurther changes or delays in third-party reimbursement to healthcare providersusing our products may adversely impact our cash position and require furthercost reductions or the need to obtain additional financing.  It is not certain that we, working withEdwards and our international distributors, will be successful in achievingbroad commercial acceptance of the Heart Laser Systems, or that we will be ableto operate profitably in the future on a consistent basis, if at all.

 

Some hospital customersprefer to acquire the Heart Laser Systems on a usage basis rather than as acapital equipment purchase.  We believethis is the result of limitations many hospitals currently have on acquiringexpensive capital equipment as well as competitive pressures in themarketplace.  A usage business model mayresult in a longer recovery period for Edwards to recoup its investment inlasers it purchases from us.  This couldresult in (1) a delay in our ability to receive additional shared revenue, ifany, that we otherwise are entitled to receive under the terms of ourdistribution agreement with Edwards (see “Application of Critical Accounting Policiesand Estimates – Revenue Recognition”) and (2) a delay in the purchase of newlasers by Edwards if its installed base of placement lasers under usagecontracts are under-performing and it chooses to re-deploy these lasers toother new hospital sites in lieu of purchasing a new laser from us.  Our cash position and our need for additionalfinancing to fund operations will be dependent in part upon the number ofhospitals that acquire Heart Laser Systems from Edwards on a usage basis andthe number and frequency of TMR procedures performed by these hospitals.  We cannot predict whether a usage based salesmodel will be successful, whether implemented by us or Edwards.

 

16

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Furthermore, we haverecently undertaken a new business strategy that involves broadening anddiversifying our product portfolio beyond our current TMR offerings, bydeveloping or acquiring new and innovative medical devices to address cardiacand vascular related markets. We believe this strategy will result in ourincurring losses for at least the next 12-24 months as we increase ourinvestments in both manufacturing and research and development staff andcapital equipment necessary to pursue these new strategic initiatives,including, but not limited to, the Optiwave 980 System.  In addition to our anticipated increase inresearch and development expenditures, we expect our capital expenditures inthe next 12 months to be in the range of $100,000 to $200,000.  We cannot be certain that we will besuccessful in implementing our new business strategy or thatfuture sales, if any, from these planned new products will recover theinvestments we plan to make. If we are unsuccessful in implementing our newbusiness strategy, our liquidity and capital resources will be adverselyaffected and we may need to obtain additional financing.

 

Therecan be no assurance that, should we require additional financing, suchfinancing will be available on terms and conditions acceptable to us.  Should additional financing not be availableon terms and conditions acceptable to us, additional actions may be requiredthat could adversely impact our ability to continue to realize assets andsatisfy liabilities in the normal course of business.  The condensed consolidated financialstatements set forth in this quarterly report do not include any adjustments toreflect the possible future effects of these uncertainties.

 

**Off-BalanceSheet Arrangements**

 

None.

 

## **Certain Factors that MayAffect our Future Results**

 

Therisks and uncertainties described below are not the only risks we face.  Additional risks and uncertainties notpresently known to us or currently deemed immaterial may also impair ourbusiness operations.  If any of thefollowing risks actually occur, our financial condition and operating resultscould be materially adversely affected.

 

***We expect to incur significantoperating losses in the near future***

 

Weincurred a net loss in the quarter ended September 30, 2004.  We expect to continue to incur net losses forat least the next 12-24 months as we increase our spending in the areas ofmanufacturing and research and development for the Optiwave 980 System.Moreover, as we continue to pursue our new business strategy of acquiring ordeveloping new medical devices to address cardiac and vascular related markets,we may continue to incur expenses that exceed the revenues we generate.  We cannot provide any assurance that we willbe successful with our new business strategy or that we will ever return toprofitability.

 

***Our company is currently dependenton one principal product line to generate revenues***

 

Wecurrently market one principal product line, which consists of two patentedhigh-powered carbon dioxide lasers and related TMR disposable kits known as theHeart Laser Systems.  Approximately 92%and 93%, respectively, of our revenues in the three and nine months endedSeptember 30, 2004 and 95% in the year ended December 31, 2003, were derivedfrom the sales and service of our Heart Laser Systems.  This absence of a diversified product line

 

17

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means that we are directly and materially impactedby changes in the market for Heart Laser Systems.

 

***Our company is dependent on oneprincipal customer***

 

Pursuantto the terms of our TMR distribution agreement with Edwards, Edwards is ourexclusive distributor for our HL2 and TMR kits in the United States.  In addition, pursuant to the terms of our newdistribution agreement with Edwards for the Optiwave 980 System (as well as anyother additional surgical products that we may develop for the treatment ofatrial fibrillation, referred to as AF, or atrial flutter), Edwards is ourexclusive worldwide distributor of those products.  As a result of the TMR relationship, Edwardsaccounted for 84% and 86% of our total revenue in the three and nine monthsended September 30, 2004 and 89% in the year ended December 31, 2003, respectively, and we expect Edwards to account for thesignificant majority of our revenue in the future.  If our relationship with Edwards does notprogress as anticipated, or if Edwards’ sales and marketing strategies fail togenerate sales of our products in the future, our revenue will decreasesignificantly and our business, financial condition and results of operationswill be seriously harmed.

 

***Our company is dependent on certain suppliers***

 

Some of the componentsfor our Heart Laser Systems, most notably the power supply and certain opticsand fabricated parts for the HL2, and certain components for the Optiwave 980System, are only available from one supplier, and we have no assurance that wewill be able to source any of our sole-sourced components from additionalsuppliers.  We are dependent upon oursole suppliers to perform their obligations in a timely manner.  In the past, we have experienced delays inproduct delivery from our sole suppliers and, because we do not have analternative supplier to produce these products for us, we have little leverageto enforce timely delivery. Any delay in product delivery or other interruptionin supply from these suppliers could prevent us from meeting our commercialdemands for our products, which could have a material adverse effect on ourbusiness, financial condition and results of operations.  Furthermore, we do not require significantquantities of any components because we produce a limited number of ourproducts each year.  Our low-quantityneeds may not generate substantial revenue for our suppliers.  Therefore, it may be difficult for us tocontinue our relationships with our current suppliers or establishrelationships with additional suppliers on commercially reasonable terms, if atall, and such difficulties may seriously harm our business, financial conditionand results of operations.

 

***We must complete development of theOptiwave 980 System and be able to manufacture it in required volumes atcommercially reasonable costs***

 

We must successfully completedevelopment of the Optiwave 980 System. We expect to outfit our facility with the necessary production and testequipment and train our employees on how to build the product. This willinclude the need to manufacture highly specialized disposable handpieces forwhich we have no comparable prior experience producing at any volume.  Until such time as we become more proficientin these manufacturing methods, if ever, we may encounter problems related to:

 

•      production yields;

•      quality control;

•      training;

 

18

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•      shortages of qualifiedpersonnel; and

•      potential capacityconstraints.

 

Such problems could severely affectour ability to adequately scale up production and meet demand for our productson a timely basis, which could harm our business, financial condition andresults of operations.

 

***Weare dependent upon our key personnel and will need to hire additional keypersonnel in the near future***

 

Our ability to operate our businesssuccessfully depends in significant part upon the retention and motivation ofcertain key technical, regulatory, production and managerial personnel and ourongoing ability to hire and retain additional qualified personnel in theseareas. Competition for such personnel is intense, particularly in the GreaterBoston area. We cannot be certain that we will be able to attract such personneland the loss of any of our current key employees could have a significantadverse impact on our business.

 

***Our company may be unable to raiseneeded funds***

 

Asof September 30, 2004, we had cash and cash equivalents totaling $10,310,000,which includes $4,533,333 received from our February 2004 transaction withEdwards.  Based on our current operatingplan, we anticipate that our existing capital resources should be sufficient tomeet our working capital requirements for at least the next 12 months.  However, if our business does not progress inaccordance with our current business plan, we may need to raise additionalfunds in the future.  We may not be ableto raise additional capital upon satisfactory terms, or at all, and ourbusiness, financial condition and results of operations could be materially andadversely affected.  To the extent thatwe raise additional capital by issuing equity or convertible securities,ownership dilution to our stockholders will result.  To the extent that we raise additionalcapital through the incurrence of debt, our activities may be restricted by therepayment obligations and other restrictive covenants related to the debt.

 

***In order to compete effectively, ourcurrent and future products need to gain commercial acceptance***

 

TMRand surgical ablation for cardiac arrhythmias are still both emergingtechnologies.  Our current and plannedfuture products may never achieve widespread commercial acceptance.  To be successful, we need to:

 

•      demonstrate to the medical community ingeneral, and to heart surgeons and cardiologists in particular, that TMR andsurgical tissue ablation for cardiac arrhythmias are procedures that areeffective, relatively safe and cost effective;

 

•      support third-party efforts to document themedical processes by which TMR procedures relieve angina and surgical tissueablation cures cardiac arrhythmias;

 

•      have more heart surgeons trained to performTMR procedures using the Heart Laser Systems and surgical tissue ablationprocedures using the Optiwave 980 System; and

 

•      maintain and expand third-party reimbursementfor the TMR procedure.

 

19

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Todate, only a limited number of heart surgeons have been trained in the use ofTMR, and we are dependent on Edwards to expand related marketing and trainingefforts in the U.S. for the use of our current and planned future products.

 

Althoughthe Heart Laser Systems have received FDA approval and the CE Mark, they havenot yet received widespread commercial acceptance.  In addition, although the Optiwave 980 Systemhas received FDA clearance, it has not yet secured the CE Mark and it istherefore not yet ready for worldwide commercialization. If we are unable tomaintain regulatory clearances, secure the CE Mark for the Optiwave 980 Systemor achieve widespread commercial acceptance of the Heart Laser Systems or theOptiwave 980 System, our business, financial condition and results ofoperations will be materially and adversely affected.

 

***Our competitor in TMR may obtain FDAapproval to market a new device, the impact of which is uncertain on the futureadoption rate of TMR***

 

Ourprimary TMR competitor, CardioGenesis, is attempting to obtain FDA approval tomarket their “percutaneous” method of performing myocardial revascularization,previously known as PMR, and recently rebranded as PMC (percutaneous myocardialchanneling), which would provide a less invasive method of creating channels inthe heart.  If PMC can be shown to be safe and effective and is approvedby the FDA, it would eliminate the need in certain patients to make an incisionin the chest, reducing costs and speeding recovery.  It is unclear what impact, if any, anapproval of a PMC device would have on the future adoption rate for TMRprocedures.  If PMC is approved, it coulderode the potential TMR market which would have a material adverse effect onour business, financial condition and results of operations.

 

***Rapid technological changes in ourindustry could make our products obsolete***

 

Ourindustry is characterized by rapid technological change and intensecompetition.  New technologies andproducts and new industry standards will develop at a rapid pace, which couldmake our current and future planned products obsolete. The advent of newdevices and procedures and advances in new drugs and genetic engineering areespecially concerning competitive threats. Our future success will depend upon our ability to develop and introduceproduct enhancements to address the needs of our customers.  Material delays in introducing productenhancements may cause customers to forego purchases of our products andpurchase those of our competitors.

 

Manypotential competitors have substantially greater financial resources and are ina better financial position to exploit marketing and research and developmentopportunities.  In addition, we are awarethat other companies are developing or already have developed proprietarysystems for the treatment of cardiac arrhythmias, and specifically AF, that maybe safer, clinically more effective, easier and more cost effective to use and,in the case of percutaneous devices, less invasive than the system we aredeveloping.

 

***We must receive and maintaingovernment clearances or approvals in order to market our products***

 

Ourproducts and our manufacturing activities are subject to extensive, rigorousand changing federal and state regulation in the U.S. and to similar regulatoryrequirements in other major international markets, including the European Unionand Japan.  These regulations and

 

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regulatory requirements are broad in scope and govern,among other things:

 

•      product design and development;

•      product testing;

•      product labeling;

•      product storage;

•      premarket clearance and approval;

•      advertising and promotion; and

•      product sales and distribution.

 

Furthermore,regulatory authorities subject a marketed product, its manufacturer and themanufacturing facilities to continual review and periodic inspections.  We will be subject to ongoing FDArequirements, including required submissions of safety and other post-marketinformation and reports, registration requirements, Quality Systemsregulations, and recordkeeping requirements. The FDA’s Quality Systems regulations include requirements relating toquality control and quality assurance, as well as the corresponding maintenanceof records and documentation.  Edwards,our distributor, depending on its activities, is also subject to certainrequirements under the Federal Food, Drug, and Cosmetic Act and the regulationspromulgated thereunder, and state laws andregistration requirements covering the distribution of our products.  Regulatory agencies may change existingrequirements or adopt new requirements or policies that could affect ourregulatory responsibilities or the regulatory responsibilities of a distributorlike Edwards.  We may be slow to adapt ormay not be able to adapt to these changes or new requirements.

 

Laterdiscovery of previously unknown problems with our products, manufacturingprocesses, or our failure to comply with applicable regulatory requirements mayresult in enforcement actions by the FDA and other international regulatoryauthorities, including, but not limited to:

 

•      warning letters;

•      patient or physician notification;

•      restrictions on our products or manufacturing processes;

•      voluntary or mandatory recalls;

•      product seizures;

•      refusal to approve pending applications orsupplements to approved applications that we submit;

•      refusal to permit the import or export of ourproducts;

•      fines;

•      injunctions;

•      suspension or withdrawal of marketing approvals orclearances; and

•      civil and criminal penalties.

 

Shouldany of these enforcement actions occur, our business, financial condition andresults of operations could be materially and adversely affected.

 

Todate, we have received the following regulatory approvals for our products:

 

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***Heart Laser Systems***

 

*United States —*We received FDA approval to market the HL1Heart Laser System in August 1998 and the HL2 Heart Laser System in January2001.  However, although we have receivedFDA approval, the FDA:

 

•      has restricted the use of the Heart LaserSystems by not allowing us to market these products to treat patients whosecondition is amenable to conventional treatments, such as heart bypass surgery,stenting and angioplasty; and

 

•      could impose additional restrictions orreverse its ruling and prohibit use of the Heart Laser Systems at any time.

 

*Europe —*Although we have the ability to market our Heart Laser System in theEuropean Union, individual members of the European Union could prohibit, andFrance has prohibited, commercial use of the Heart Laser Systems.

 

Wereceived the CE Mark from the European Union for the HL1 and HL2 in March 1995and February 2001, respectively. However:

 

•      the European Union could impose additionalrestrictions or reverse its ruling and prohibit use of the Heart Laser Systemsat any time; and

 

•      other European Union countries could prohibit orrestrict use of the Heart Laser Systems.

 

*Japan —*We cannot market our product in Japan until we receive governmentapproval.

 

Webelieve that Japan represents the largest potential market for the Heart LaserSystems in Asia.  Prior to marketing theHeart Laser Systems in Japan, we must receive approval from the Japanesegovernment.  This approval requires aclinical study in Japan with at least 60 patients.  A study was completed in 1998 with the HL1.Although the results of this study have been submitted to the Japanesegovernment, we do not know whether the clinical study will be sufficient orwhen, if ever, we will receive approval to sell the HL1 in Japan.  In addition, it is unclear what impact the introductionof the HL2 into the U.S. and other international markets will have on ourability to market the HL1 in Japan.

 

***Optiwave 980 System***

 

*UnitedStates —*The FDA has given clearance to the Optiwave 980System through the 510(k) premarket notification process with indications foruse as a surgical instrument for coagulation of soft tissue, including cardiactissue, in conjunction with or without endoscopic equipment in the contact ornon-contact mode in open or closed surgical procedures.

 

Although we have receivedclearance from the FDA only for the indications of use stated above,physicians, under the practice of medicine exception, may use the Optiwave 980System in any manner they choose in treating an individual patient, includingusing the device to treat patients with AF. However, neither we nor Edwards have conducted any clinical trialsdesigned to obtain data to submit to the FDA for the purpose of obtaining aspecific indication for use of the Optiwave

 

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980System that would allow us to make claims or otherwise market this device forthe treatment of AF. We are aware of at least one companywhich has indicated they have submitted data to the FDA in support of alabeling claim that, if clearance is obtained, would allow them to market theirdevice for the treatment of AF.

 

In the event this companyor other competitors are successful in obtaining specific indications of usefor their devices in the treatment of AF, the Optiwave 980 System may be at acompetitive marketing disadvantage until such time, if ever, that Edwardsconducts a clinical trial, submits sufficient data to the FDA by means of a new510(k) and obtains clearance to market the Optiwave 980 System for thetreatment of AF. We cannot provide any assurance that Edwards will ever conductsuch a clinical trial or, if they do, that the data they obtain and submit tothe FDA will be sufficient for the FDA to expand the current indications of useand provide clearance for the Optiwave 980 System to be marketed for the treatmentof AF. Also, we cannot assure you that even if such clearance is obtained, thatit will be obtained in a timely enough fashion for our products to remaincompetitive in the marketplace.

 

*Europe—*The Optiwave 980 System cannot be marketed in the EU untilsuch time as it receives CE Mark approval. We need to complete and submit therelevant technical documentation to the appropriate certifying body in order tobe able to apply the CE Mark that, if granted, will enable the product to bedistributed in the EU.

 

***Changes in third party reimbursement for our TMR procedurecould materially affect future demand for our TMR products***

 

 Currently, Medicare and Blue Cross Blue Shieldprovide coverage for TMR when it is performed as both a sole therapy treatmentand when used as an adjunct to bypass surgery. Certain other private insurancecompanies and health maintenance organizations also currently providereimbursement for these TMR procedures performed with our products, andphysician reimbursement codes have been established for both surgicalprocedures; however, we have limited data as to the breadth of this coveragefor the TMR procedures by private insurance companies and health maintenanceorganizations. Should third party insurance reimbursement for our TMR productsbe reduced or eliminated in the future, our business, financial condition andresults of operations would be materially and adversely affected.

 

InJuly 2004, the Centers for Medicare and Medicaid Services (CMS) convened theMedicare Coverage Advisory Committee (MCAC) to review and discuss the evidenceand clinical data regarding TMR. The MCAC is an advisory panel consisting ofclinicians and other medical experts which CMS utilizes to supplement their owninternal expertise. Although the MCAC was not convened for the purpose ofmaking a reimbursement coverage recommendation, we believe CMS is likely toreview the information presented at the MCAC meeting and decide among thefollowing options: (1) continue existing Medicare coverage for TMR without anymodification, (2) issue new guidelines clarifying the patient criteria forMedicare reimbursement, (3) reduce or modify the existing reimbursementcoverage for TMR, (4) eliminate reimbursement coverage for TMR altogether, or(5) request additional clinical studies to be performed.  We believe the most likely course of actionCMS will take is to issue new guidelines clarifying the patient criteria forMedicare reimbursement of TMR and request additional clinical studies to beperformed. However, no assurance can be given that CMS will choose this courseof action or not adopt another outcome.

 

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***Asserting and defending intellectualproperty rights may impact our results of operations***

 

Inour industry, competitors often assert intellectual property infringementclaims against one another.  The successof our business depends on our ability to successfully defend our intellectualproperty.  Future litigation may have amaterial impact on our financial condition even if we are successful inmarketing our products. We may not be successful in defending or asserting ourintellectual property rights.

 

Anadverse outcome in any litigation or interference proceeding could subject usto significant liabilities to third parties and require us to cease using thetechnology that is at issue or to license the technology from thirdparties.  In addition, a finding that anyof our intellectual property is invalid could allow our competitors to moreeasily and cost-effectively compete with us. Thus, an unfavorable outcome in any patent litigation or interferenceproceeding could have a material adverse effect on our business, financialcondition or results of operations.

 

Thecost to us of any patent litigation or interference proceeding could besubstantial.  Uncertainties resultingfrom the initiation and continuation of patent litigation or interferenceproceedings could have a material adverse effect on our ability to compete inthe marketplace.  Patent litigation andinterference proceedings may also absorb significant management time.

 

***We may be subject to productliability lawsuits; our insurance may not be sufficient to cover damages***

 

Wemay be subject to product liability claims. Such claims may absorb significant management time and could degrade ourreputation and the marketability of our products.  If product liability claims are made withrespect to our products, we may need to recall the implicated product whichcould have a material adverse effect on our business, financial condition andresults of operations. In addition, although we maintain product liabilityinsurance, we cannot be sure that our insurance will be adequate to coverpotential product liability lawsuits. Our insurance is expensive and in thefuture may not be available on acceptable terms, if at all. If a successfulproduct liability claim or series of claims exceeds our insurance coverage, itcould have a material adverse effect on our business, financial condition andresults of operations.

 

***We are subject to risks associatedwith international operations***

 

Aportion of our product sales are generated from operations outside of theU.S.  Establishing, maintaining andexpanding international sales can be expensive. Managing and overseeing foreign operations may be difficult and productsmay not receive market acceptance.  Risksof doing business outside the U.S. include, but are not limited to, thefollowing: agreements may be difficult to enforce and receivables difficult tocollect through a foreign country’s legal system; foreign customers may havelonger payment cycles; foreign countries may impose additional withholdingtaxes or otherwise tax our foreign income, impose tariffs or adopt otherrestrictions on foreign trade; U.S. export licenses may be difficult to obtain;and the protection of intellectual property rights in foreign countries may bemore difficult to enforce.  There can beno assurance that our international business will grow or that any of theforegoing risks will not result in a material adverse effect on our business orresults of operations.

 

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***Because we are incorporated inCanada, you may not be able to enforce judgments against us and our Canadiandirectors***

 

UnderCanadian law, you may not be able to enforce a judgment issued by courts in theU.S. against us or our Canadian directors. The status of the law in Canada isunclear as to whether a U.S. citizen can enforce a judgment from a U.S. courtin Canada for violations of U.S. securities laws. A separate suit may need tobe brought directly in Canada.

 

***Our stock price has historicallyfluctuated and may continue to fluctuate significantly in the future which mayresult in losses for our investors***

 

Ourstock price has been and may continue to be volatile. Some of the factors thatcan affect our stock price are:

 

•      the announcement of new products, services ortechnological innovations by us or our competitors;

•      actual or anticipated quarterly increases ordecreases in revenue, gross margin or earnings, and changes in our business,operations or prospects;

•      speculation or actual news announcements inthe media or industry trade journals about our company, our products, the TMRor cardiac ablation procedures or changes in reimbursement policies by Medicareand/or private insurance companies;

•      announcements relating to strategic relationships ormergers;

•      conditions or trends in the medical device industry;

•      changes in the economic performance or marketvaluations of other medical device companies; and

•      general market conditions or domestic orinternational macroeconomic and geopolitical factors unrelated to ourperformance.

 

***The market price of our stock mayfall if shareholders sell their stock***

 

Certaincurrent shareholders hold large amounts of our stock, which they could sell inthe public market from time to time. Sales of a substantial number of shares of our common stock within ashort period of time could cause our stock price to fall.  In addition, the sale of these shares couldimpair our ability to raise capital through the sale of additional stock.

 

***We have no intention to pay dividends***

 

Wehave never paid any cash dividends on our common stock. We currently intend toretain all future earnings, if any, for use in our business and do not expectto pay any dividends in the foreseeable future.

 

**Item 3.****   ****Quantitative and QualitativeDisclosures about Market Risk**

 

Aportion of our operations consists of sales activities in foreignjurisdictions.  We manufacture ourproducts exclusively in the U.S. and sell our products in the U.S. and abroad.As a result, our financial results could be affected by factors such as changesin foreign currency exchange rates or weak economic conditions in the foreignmarkets in which we distribute our products. Our operating results are exposed to changes in exchange rates between the U.S. dollar

 

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and foreign currencies, especially the SwissFranc and the Euro. When the U.S. dollar strengthens againstthe Franc or Euro, the value of foreign sales decreases.  When the U.S. dollar weakens, the functional currency amount ofsales increases. No assurance can be given that foreign currencyfluctuations in the future may not adversely affect our business, financialcondition and results of operations, although at the present we do not believethat our exposure is significant.

 

The Company does not hedgeany balance sheet exposures and intercompany balances against future movementsin foreign exchange rates.  We do notbelieve that a 10% change to the applicable exchange rates would have amaterial impact on our future results of operations or cash flows.  However, the Company’s sensitivity analysisof the effects of changes in foreign currency exchange rates in such magnitudedoes not factor in a potential change in sales levels or local prices for itsproducts as a result of the currency fluctuations or otherwise.

 

Ourinterest income is sensitive to changes in the general level of U.S. andforeign interest rates. In this regard, changes in U.S. and foreign interestrates affect the interest earned on our cash and cash equivalents.  We do not believe that a 10% change tointerest rates would have a material impact on our future results of operationsor cash flows.

 

## **Item 4.**    Controls and Procedures

 

Ourmanagement, with the participation of our Chief Executive Officer, or CEO, andChief Financial Officer, or CFO, evaluated the effectiveness of our disclosurecontrols and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under theSecurities Exchange Act) as of September 30, 2004. Based on this evaluation,our CEO and CFO concluded that, as of September 30, 2004, our disclosurecontrols and procedures were (1) designed to ensure that material informationrelating to us, including our consolidated subsidiaries, is made known to ourCEO and CFO by others within those entities, particularly during the period inwhich this report was being prepared and (2) effective, in that they providereasonable assurance that information required to be disclosed by us in thereports that we file or submit under the Securities Exchange Act is recorded,processed, summarized and reported within the time periods specified in theSecurities and Exchange Commission’s rules and forms.

 

Nochange in our internal control over financial reporting (as defined in Rules13a-15(f) and 15d-15(f) under the Securities Exchange Act) occurred during thefiscal quarter ended September 30, 2004 that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting.

 

# **Part II.  Other Information**

 

**Item 6.****   ****Exhibits**

 

10.1                Form of Stock Option Grant Letter toNon-Employee Directors of the Registrant under the Registrant’s 1995 StockOption Plan, 1997 Executive Stock Option Plan and 2000 Equity Incentive Plan.

 

31.1                Certification of Chief Executive Officerpursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of1934, as adopted pursuant to

 

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Section 302 of the Sarbanes-Oxley Act of 2002.

 

31.2                Certification of Chief Financial Officerpursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

32.1                Certification pursuant to 18 U.S.C. Section1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
|                                | PLC SYSTEMS INC. |
|-------------------------------------|------------------|
|                                |             |   |
| Date:  November  11, 2004 | By:              | /s/  James G. Thomasch |   |
|                                |             | James  G. Thomasch |
|                                |             | Chief  Financial Officer  (Principal Financial Officer and Chief  Accounting Officer) |

 

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**EXHIBITINDEX**

 
| **Exhibit  Number** | ** ** | **Description of Document**                                                                                                                                                                           |
|---------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                  |
| 10.1                |       | Form  of Stock Option Grant Letter to Non-Employee Directors of the Registrant  under the Registrant’s 1995 Stock Option Plan, 1997 Executive Stock Option  Plan and 2000 Equity Incentive Plan. |
|                |       |                                                                                                                                                                                                  |
| 31.1                |       | Certification  of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the  Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.     |
|                |       |                                                                                                                                                                                                  |
| 31.2                |       | Certification  of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the  Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.     |
|                |       |                                                                                                                                                                                                  |
| 32.1                |       | Certification  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                             |

 

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